From today's wsj:
The new plant will be among the first to etch chips on pizza-size 300mm wafers instead of 200mm wafers and next year it will become one of the first to produce chips with line widths of less than one nanometer
IBM Bets Big on Slumping Sector
With Opening of New Chip Plant
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
ARMONK, N.Y. -- International Business Machines Corp. is putting down a big bet on the semiconductor industry Wednesday, when it holds the ribbon-cutting ceremony for a $3 billion chip-fabrication plant in East Fishkill, N.Y.
The plant -- IBM's costliest-ever capital investment -- is opening amid a chip-industry slump. Some investors fear that the plant won't have enough business to cover its depreciation costs, putting a further drag on earnings at Big Blue's already struggling semiconductor division. Uncertainty about the giant plant's success makes predicting IBM's future earnings a "crapshoot," Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., wrote in a recent report.
But John Kelly, senior vice president in charge of IBM's semiconductor unit, said such fears are unwarranted. In an interview, Mr. Kelly said the plant has signed up enough customers to become profitable by the end of this year. What's more, he said the new plant, combined with cost cutting elsewhere, will enable the semiconductor unit to "return to profitability in the second half."
If so, IBM investors will be cheered. The semiconductor unit is Big Blue's most troubled unit, and during the first half posted a pretax loss of $1.08 billion, including about $550 million in write-downs of old machinery. Semiconductor revenue fell 35% for the six-month period from the prior year's first half, to $1.93 billion.
When IBM made the commitment to build the chip-fabrication plant in 2000, telecommunications and networking companies were clamoring for the types of high-performance chips that IBM makes. The company's existing facility, in South Burlington, Vt., uses older equipment and technology, and the new plant seemed like a sure bet.
Since then, many potential customers have declared bankruptcy amid a wider communications-industry slump, and others have slashed orders. As a result, IBM's semiconductor business turned from one of its money-spinners into a drag on earnings. In preparation for the East Fishkill plant's opening, Big Blue recently slashed capacity and wrote down older equipment in its Vermont facility.
IBM is a rarity among computer makers in manufacturing its own semiconductors, and can fill up part of the new chip facility with products for its mainframe and server computers. But it relies on sales to outside customers to provide enough business to cover the huge costs of running its semiconductor operation.
So far, IBM's spending on the plant hasn't hit its bottom line because the costs have been capitalized and IBM doesn't have to start depreciating them until production begins. With that happening soon, some investors have questioned whether profits from the plant will cover the substantial depreciation charges, damaging IBM's earnings outlook.
IBM says the depreciation charges will ramp up slowly. It will record some starting this year, but won't say how much. But it says the depreciation charge for the plant will be $240 million higher next year than this year. By 2004, when it is fully online, the plant will increase depreciation by $410 million a year, roughly equal to 4% of IBM's pretax profit in 2001.
Some IBM investors, who like the company's recurring revenue from services and other businesses, are nervous about spending such big sums on the cyclical chip business. Marty Shagrin, research analyst at Victory Capital in Cleveland, which is an IBM stockholder, said: "The chip business kind of offsets the recurring traits that you like" about Big Blue's earnings stream. "Most people are in IBM because of the perception of it being a relatively safe haven. This brings a level of volatility that concerns us," he said.
IBM's Mr. Kelly said the advanced technology that the plant features is attracting the new customers it needs to cover these costs. These customers, he said, want chips that use less power to reduce heat buildup and operate faster.
The new plant will be among the first to etch chips on pizza-size 300mm wafers instead of 200mm wafers and next year it will become one of the first to produce chips with line widths of less than one nanometer, one-thousandth the width of a human hair. "Those are technologies our competitors are having a very difficult time with," Mr. Kelly said. "Several customers have come to us having tried competitors."
Mr. Kelly said the plant is fully booked for its start-up phase, which runs into sometime next year -- he wouldn't specify a date. One new customer that IBM has announced for the plant is Xilinx Inc., a San Jose, Calif., semiconductor-design firm. People familiar with the situation say another customer will be Sony Corp., with whom IBM is designing a chip for the next-generation PlayStation. Those chips won't start production until 2004. |
